Thank You

Error.

New Yorkers have a love-hate relationship with crowds. We like a little bustle in our cities, but we think Times Square on New Year's Eve, Rockefeller Center at Christmas, or spectacle restaurants on Saturday nights are for tourists and amateurs. So while my 401(k) plan and I are happier these days, the throngs gathering to cheer the market's melt-up are making me a little uneasy.

There's much to like about the stock market, but the new group hug isn't one of them. Despite one bad apple -- quite literally, the new rot in
Apple's
aapl -0.11069796266170888%Apple Inc.U.S.: NasdaqUSD128.9471
-0.1429-0.11069796266170888%
/Date(1425413351115-0600)/
Volume (Delayed 15m)
:
25432004
P/E Ratio
17.25777777777778Market Cap
751916704040.229
Dividend Yield
1.4583184657248618% Rev. per Employee
2153110More quote details and news »aaplinYour ValueYour ChangeShort position
(ticker: AAPL) shares -- large stocks have rallied five of the past six weeks, and small stocks nine of the past 10. The quickest January start since 1987 has lifted the Dow Jones Industrial Average to a five-year peak, while a 20% gain in just 10 weeks has sherpaed the Dow Jones Transportation Average to an all-time high. The Standard & Poor's 500 hasn't suffered the indignity of a 10% correction in 480 days -- not nearly as long as the 1,673-day lull between 2003 and 2007, but already the 10th-longest ever, says Bespoke Investment Group.

Just like that, the horde of bullish investors has swelled to 52%, the most in two years and double the herd just six months ago. The mood swing is understandable: After all our brooding about fiscal calamity, even half measures -- a three-month extension of the U.S. debt ceiling, a postponement of the budget tussle -- can feel like reprieve. Against lowered expectations, the 5.2% uptick in fourth-quarter revenues that companies are now reporting, and the 7.7% profit increase, can seem like causes for celebration. As a result, nine out of 10 stocks today are levitating above their 50-day averages, a sign the market is becoming overbought in the short term.

With the rally, the S&P 500 is lifted to 14 times projected profits. That's hardly alarming given the lavish central-bank support and scant inflation, but pushing highs reached in the spring of 2012, when expectations began to build in earnest. We'll need China to cooperate, and improving U.S. jobs and housing cues to keep improving. Bespoke tracks the net number of economic reports that surpassed forecasts over the previous 50 days, and while that tally climbed to 23 in mid-November amidst our collective teeth-gnashing, it has since slipped to -1, a sign forecasts are catching up to reality. And while more than $200 billion in tax hikes seemed factored into many economists' projections, the automatic spending cuts from the spending sequester -- these could kick in during March -- seem less so.

There's also some nervousness that the stock market's bluster isn't mirrored in the bond market. The yield on 10-year Treasuries has repaired from record lows below 1.5% but hasn't broken above 2%, and the yield curve -- the differential between rates on short and long bonds -- hasn't steepened all that much. It's certainly possible that "the onslaught of global central-bank accommodation has desensitized bond markets to the growing reflation trade," notes Thomas Tzitzouris, head of fixed-income research at Strategas, just as it's possible "that the equity rally is still lacking conviction and is at risk of a retracement."

IT HELPS THAT THERE'S PENT-UP demand for capital spending, and parts of the labor market are tightening -- a potential drag on employers' profit margins, but a boost to consumer spending. And institutions still seem underinvested: Stocks make up about 35% of the assets at U.S. private pension funds, below their long-term average near 44%.

So how long might investors keep buying the dips? The answer may depend on the mood in the bond market. Michael Hartnett, BofA Merrill Lynch's chief investment strategist, has argued that 2012 likely was the high-water mark for trades geared to the era of deleveraging. Pressured by record low yields and the potential for negative returns, investors are steering some money back into equity funds, after years of lunging at bond funds. "Central-bank liquidity has been by far and away the most important driver of asset prices since the great financial crisis," he writes. "But the straws in the wind suggest the period of maximum liquidity is close to an end." Sure, Japan has belatedly joined the asset-buying bandwagon, but it may be the last of the great reflations.

Just as a high-liquidity, low-growth regime had been bullish for bonds, a shift toward a lower-liquidity, higher-growth era should help stocks, Hartnett argues. "So long as global inflation remains between 1%-4%, investors can look forward to a period of multiple re-rating for equities, provided that earnings per share grow rather than decline."

Already, the party at the peak has been joined by mid-cap stocks, small stocks, and the S&P 500 equal-weighted index. For indifferent investors on the sidelines, that crowd is growing just big and loud enough to make some people think twice about missing out.